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jawckey
Level 2

House sale - Tax implications

Pl. help with this.

 

Me and my wife owned and lived in a house in CA for couple of decades and sold it recently. We file married filing jointly. The gain was about $900,000 on the house sale, out of which I do know that the first $500,000  qualifies for being tax free gain. Is there anyway to save taxes on the excess gain of $400,000? OR we must be paying FED capital gains and CA income tax on the $400,000?

 

Few months before the sale of the above house, we also bought a new less expensive house, and refinanced the above house such that we can buy the new house fully cash down. Is there a way we could account the purchase of this new house against $400,000 gain of the old house without losing the benefit of $500,000 tax free gain on the sale of the old house? This new house is going to be our primary house now on.

 

Appreciate helpl.

1 Best answer

Accepted Solutions
DaveF1006
Employee Tax Expert

House sale - Tax implications

Yes, you could be subject to estimated tax penalties to the IRS if you expect to owe tax of $1,000 or if you paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. or more when your return is filed.

 

There are exceptions to this rule if you meet all three of the following conditions.

  • You had no tax liability for the prior year
  • You were a U.S. citizen or resident for the whole year
  • Your prior tax year covered a 12-month period

You had no tax liability for the prior year if your total tax was zero or you didn’t have to file an income tax return. Tax liability amounts are shown on Line 24 of your 1040 in 2020.  If there is an amount shown on line 24, then you do not meet the condition for the exception. 

 

For the State of California, you must pay estimated taxes if you expect to owe at least"

  • $500
  • $250 if married/RDP filing separately

And, you expect your withholding and credits to be less than the smaller of one of the following:

  • 90% of the current year’s tax
  • 100% of the prior year’s tax (including alternative minimum tax)"

My advice is to make an estimated tax payment by January 15 to avoid penalties that may occur. You can do this by going to your 2020 Turbo Tax Program and:

  1. With your return open, go to federal
  2. Go to uncommon tax situations
  3. Scroll to Other Tax Forms
  4. Form W-4 and Estimated Taxes
  5. For CA, as you prepare your return, you will reach a page that says "A few things before we wrap up your state taxes"  Go to other forms>estimated taxes for next year>start. As you go through the questions, you will wish to pick the January date in 2022. Remember, you need to be in the 2020 return to access this feature. 

It may be easier to download an payment voucher for both the Federal and California State return instead of trying to do this through Turbo Tax. Here is a link for a payment voucher for 1/18/22 on page 9 for the federal Government.  Print that page and tear off the voucher to send in. You may get the Ca estimated tax form at this link.  Print the voucher that says 1/22/2022.

 

The penalties for not paying estimated taxes may vary. This link may give you an idea on how much of a penalty that may incur in your federal taxes.  Also this State of California link states that your penalty is 3% underpayment penalty.

 

 

[ Edited 12/29/21| 04:53 PM PST]

 

 

@jawckey

 

 

 

 

 

 

 

 

 

 

 

**Say "Thanks" by clicking the thumb icon in a post
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View solution in original post

11 Replies
VolvoGirl
Level 15

House sale - Tax implications

Sorry no.    The old rule about rolling over the gain ended in May 1997.  Now it doesn't matter what you do with the gain or proceeds.

fanfare
Level 15

House sale - Tax implications

presumably your property tax is now lower,

put the difference into 1040-ES payments, you owe the capital gains tax and state tax on $400,000.

I hear CA is a high-tax state.

fanfare
Level 15

House sale - Tax implications

You can apply for a Home Equity loan with which to pay your income tax.

Don't say that to the loan officer.

jawckey
Level 2

House sale - Tax implications

Interesting ...

 

But didn't they limit and/or eliminate most of the claim on can do on any interest payments like mortgage and or HELLOC? So even if I pay income tax with funds withdrawn from Helloc, the helloc interest is not much deductible in IT return like it used to be couple of years back.

 

So is this even valid?

 

regards

Carl
Level 15

House sale - Tax implications

Interest on on HELOC is only deductible on that portion of the funds used to "buy, build or improve" one's primary residence. So if you take a HELOC to pay taxes with, none of the interest on the HELOC is deductible.

 

jawckey
Level 2

House sale - Tax implications

Pl. allow me to rephrase ... even if I used HELLOC funds to build/improve primary residence, any helloc interest, if itemized, if it comes less than standard deduction, it still will not help taxes, right? In my case, I have to choose standard deduction only, which is superior to itemization.

 

So, am I correct to say that helloc interest will help taxes only if I can itemize but not if I choose standard deduction because the latter is better for me. 

 

Right?

Carl
Level 15

House sale - Tax implications

Correct. Not just interest matters when it comes to itemizing. If the total of all of your itemized deductions, (charitable contributions, mortgage interest, medical expenses, etc.) do not exceed your standard deduction, then itemizing will not help you on the tax front.

 

jawckey
Level 2

House sale - Tax implications

thanks for the help.

 

Pl. also clarify this one. This gain is substantial and so will be the tax burden. So, to offset my pain, I intend to invest the amount of tax till about 31st of March 2022 and pay it along with the IT return that I will file in the 1st week of April 2022. By the way, the sale closed only in December 2021, so not very long.

- Am I required to pay FED cap gains and CA income tax on property sale gain right away

- OR can I still hold the payment till I file return in Apr 2022. And if I do this, will incur interest to FED and CA?

 

regards

 

DaveF1006
Employee Tax Expert

House sale - Tax implications

Yes, you could be subject to estimated tax penalties to the IRS if you expect to owe tax of $1,000 or if you paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. or more when your return is filed.

 

There are exceptions to this rule if you meet all three of the following conditions.

  • You had no tax liability for the prior year
  • You were a U.S. citizen or resident for the whole year
  • Your prior tax year covered a 12-month period

You had no tax liability for the prior year if your total tax was zero or you didn’t have to file an income tax return. Tax liability amounts are shown on Line 24 of your 1040 in 2020.  If there is an amount shown on line 24, then you do not meet the condition for the exception. 

 

For the State of California, you must pay estimated taxes if you expect to owe at least"

  • $500
  • $250 if married/RDP filing separately

And, you expect your withholding and credits to be less than the smaller of one of the following:

  • 90% of the current year’s tax
  • 100% of the prior year’s tax (including alternative minimum tax)"

My advice is to make an estimated tax payment by January 15 to avoid penalties that may occur. You can do this by going to your 2020 Turbo Tax Program and:

  1. With your return open, go to federal
  2. Go to uncommon tax situations
  3. Scroll to Other Tax Forms
  4. Form W-4 and Estimated Taxes
  5. For CA, as you prepare your return, you will reach a page that says "A few things before we wrap up your state taxes"  Go to other forms>estimated taxes for next year>start. As you go through the questions, you will wish to pick the January date in 2022. Remember, you need to be in the 2020 return to access this feature. 

It may be easier to download an payment voucher for both the Federal and California State return instead of trying to do this through Turbo Tax. Here is a link for a payment voucher for 1/18/22 on page 9 for the federal Government.  Print that page and tear off the voucher to send in. You may get the Ca estimated tax form at this link.  Print the voucher that says 1/22/2022.

 

The penalties for not paying estimated taxes may vary. This link may give you an idea on how much of a penalty that may incur in your federal taxes.  Also this State of California link states that your penalty is 3% underpayment penalty.

 

 

[ Edited 12/29/21| 04:53 PM PST]

 

 

@jawckey

 

 

 

 

 

 

 

 

 

 

 

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"

View solution in original post

jawckey
Level 2

House sale - Tax implications

My goodness! What a kind hearted person you are! God bless you! For such precise and exhaustive information. 

 

Wish you happy and safe holidays and a bright new year.

 

regards

fanfare
Level 15

House sale - Tax implications

I suggested a HELOC because I got the impression that you were short of cash to pay the income tax.

If that's not the case, don't put your cash into the stock market.

What if the market goes down, then where will you be ??

Instead, make the estimated tax payments.

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